Wells Fargo Q3 Profit Jumps On Lower Costs, Consumer Loan Boost

New York City, USA : America’s third-largest bank Wells Fargo & Co (WFC.N) posted a surprise increase in revenue (32 percent jump) with the figure rising to $21.9 billion in the third quarter, after analysts expected a slight decline. The bank benefited from rising interest rates and saw growth in consumer lending originations in areas such as auto and personal loans.

It’s the first time this year revenue has grown and may indicate that Chief Executive Officer Tim Sloan’s efforts to turn Wells Fargo around are paying off. The lender has posted muted results in the wake of a series of consumer scandals that erupted in 2016 when the bank disclosed it may have opened millions of accounts on behalf of customers who didn’t want them, and the Federal Reserve has prohibited Wells Fargo from increasing assets until missteps are fixed to the regulator’s satisfaction.

“We saw positive business trends in the third quarter, including growth in primary consumer checking customers, increased debit and credit card usage, and higher year-over-year loan originations in auto, small business, home equity and personal loans and lines,” Chief Financial Officer John Shrewsberry said in the statement.

Shares of San Francisco-based Wells Fargo climbed 2.3% to $52.60 at 8:27 a.m. in early New York trading. They closed at $51.44 on Thursday and have dropped 15% this year, compared with a 5.1% decline in the KBW Bank Index.

Still, net income rose less than analysts expected. It climbed to $6 billion, or $1.13 a share, missing the $1.18-a-share average estimate of 28 analysts.

Total average loans fell to $939.5 billion, down $12.9 billion, or 1%, the lowest level in more than two years.

Shrewsberry said at a September investor conference that the drop in loans is related to competition across consumer and commercial categories, not the Fed’s asset cap.

Noninterest expense fell to $13.8 billion from $14.4 billion a year earlier. The average estimate of 15 analysts was $13.4 billion. Net interest margin, the difference between what a bank charges borrowers and pays depositors, increased 1 basis point from the previous three-month period to 2.94%. Efficiency ratio, a measure of profitability, improved to 62.7% from 64.9% in the second quarter. Sloan is targeting 55% to 59% in the long term, excluding litigation costs.

Wells Fargo & Co gave out more personal and automobile loans, and made headway in its cost-cutting plan.

Wells has been striving to rebuild its reputation with customers over the last two years after a series of scandals, fines and regulatory probes, especially in its consumer banking business, dented its brand and reputation.

The company is making good on its promise to chop billions of costs over the next several years. Non-interest expenses in the third quarter fell 4.1 percent to $13.8 billion.

Chief Financial Officer John Shrewsberry has vowed to reduce about $3 billion in expenses by 2020. The bank also plans to pare its network by roughly 800 branches and cut up to 10 percent of its workforce over the next three years.

Total revenue in the quarter beat analyst estimates, rising 0.4 percent to $22 billion, with community banking – an area most closely tied to a sales scandal – the only unit recording an increase in revenue.

Analysts expected revenue of $21.9 billion, according to I/B/E/S data from Refinitiv.

“While these results were less noisy than previous quarters, more fallout from prior misdeeds cannot be ruled out,” Allen Tischler, senior vice president with Moody’s Investors Service said.

Net income applicable to common stockholders rose to $5.45 billion, or $1.13 per share, in the quarter ended Sept. 30, from $4.13 billion or 83 cents per share a year ago.

On an adjusted basis, the company narrowly missed analysts’ estimates, earning $1.16 per share, compared to estimates of $1.17, according to I/B/E/S data from Refinitiv.

“While these results were less noisy than previous quarters, more fallout from prior misdeeds cannot be ruled out,” Allen Tischler, senior vice president with Moody’s Investors Service said.

Net income applicable to common stockholders rose to $5.45 billion, or $1.13 per share, in the quarter ended Sept. 30, from $4.13 billion or 83 cents per share a year ago. reut.rs/2NCtgK8

On an adjusted basis, the company narrowly missed analysts’ estimates, earning $1.16 per share, compared to estimates of $1.17, according to I/B/E/S data from Refinitiv.

Industry experts think the increase in interest rates, albeit gradual, will likely present headwinds to loan growth in the coming quarters as customers become less willing to borrow at higher interest rates.

Wells Fargo ended the quarter with $1.88 trillion in assets. Its average total deposits declined 3 percent to $1.27 trillion, well under the Federal Reserve’s $1.95 trillion asset cap it had imposed on the bank.

The regulator had said it would lift the cap only after Wells showed sufficient improvement in governance and controls. The bank’s executives expect the cap to be lifted in the first half of next year.

Wells Fargo said its average deposits fell by 3% from a year ago to $1.3 trillion. The bank cited lower corporate deposits caused in part by efforts taken to “manage to the asset cap.”

But it wasn’t just about the sanctions from the Fed. Wells Fargo said its average consumer and small business banking deposits fell by 2% over the past year to $743.5 billion. The bank did not blame reputation issues.
Instead, Wells Fargo said “consumers continued to move excess liquidity to higher-rated alternatives.” In other words, Americans moved money into stocks, mutual funds and money market funds that offer high returns.

Yet Wells Fargo’s rivals did not appear to suffer the same fate. Citigroup’s deposits climbed by 4% to $1 trillion. Excluding currency fluctuations in Citi’s international business, deposits would have been up by 5%.
JPMorgan’s average deposits jumped by 4% to $1.5 trillion. “We continue to grow deposits faster than the industry, even as the pace slows with rising rates,” JPMorgan boss Jamie Dimon said in a statement.

Wells Fargo also said it paid higher rates on the deposits it does have. Average deposit costs nearly doubled from a year ago. The higher rates are a reflection of the Federal Reserve’s rate hikes and increased competition, especially from online lenders.

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Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.PhoneEmail